A tax professional from H&R Block once told her freelancer client that being self-employed isn’t all that it’s cracked up to be. What she meant was that most people don’t realize all of the added expenses that you must bear when you work for yourself. For example, when you work for an employer, you and your employer split the costs of your payroll (Social Security and Medicare) taxes. However, when you are self-employed, you have to pay 100% of those payroll taxes via the self-employment tax, which is 15.3% of your net income.
Therefore, given the added expenses of being self-employed, it’s important to find savings in the tax code from legal deductions. Here are five important tax deductions that every freelancer should know about.
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Home Office Deduction
Many freelancers work out of their home. If you work out of a home office – a dedicated space in your house that is used 100% for your business – then you can take the home office tax deduction. The IRS now offers a simple way to calculate this deduction. You multiply $5 by the square footage of your office. For example, if your home office is 200 square feet, then your deduction would be worth $1,000. The other method – based on the percentage of your home used for your office – is much more complicated to calculate. For example, let’s say your home is 2,000 square feet and your home office is 200 square feet. That means you are using 10% of your home for you business. You would then multiply 10% by the amount of money that you pay each year for mortgage or rent (assuming you don’t own your home outright). Most freelancers find the first method easier to calculate for the home office deduction.
Self-Employment Tax Deduction
As a freelancer, you are responsible for bearing the full amount of Social Security and Medicare taxes – known as the self-employment tax. That comes out to 15.3% of your net income. Luckily, the IRS lets you deduct 50% of the tax from your net income by taking the self-employment tax deduction.
Self-Employed Health Insurance Deduction
If you are self-employed, buy your own health insurance, and are not eligible for coverage from a spouse (or anywhere else), then you can claim the health insurance deduction. The health insurance deduction is an above-the-line deduction, so you claim it even if you don’t itemize on your tax return.
Vehicle Expenses Related to Your Business
If you are self-employed and use your vehicle for business use, then the IRS allows you to deduct the costs associated with using your vehicle. However, you will need to have a good method of tracking your mileage. The vehicle deduction for the 2019 tax year is worth 58 cents per mile. Therefore, if you drove your vehicle 10,000 miles for your business in 2019, you would multiply 10,000 by 58 cents. Then, your vehicle deduction would be worth $5,800.
Retirement Contributions to a Solo 401k
Finally, as a freelancer, you will have to figure out how to save for retirement. Many freelancers open a Solo 401k account: A special retirement plan for the self-employed who have no employees. If you contribute to a Solo 401k account – you can deduct up to $56,000 a year in qualified retirement contributions.
In short, if you use part of your home for your business, then you can legally take the home office deduction. Don’t forget to deduct 50% of your self-employment taxes to ease the burden of paying your full Social Security and Medicare tax liability. If you are a freelancer that pays for your own health insurance, you can deduct your premiums from your net income. If you use your vehicle for your business – and track your mileage – then you can deduct the mileage from your taxes. Lastly, if you make retirement contributions to a Solo 401k account, you can deduct those contributions from your net income.